Friday, June 18, 2010

Gold: The Invisible Bull Market

18 & 19 June 2010

On February 11, 2007, I pointed out that gold's crossing the historic $800 threshold had elicited very few headlines, offering evidence that at that time, we remained in an early-stage gold bull market.

OK. Gold touched bottom at $255 per ounce for the last time on April 1, 2001 - over 9 years ago. That is, gold's bull market has persisted for almost a decade. Gold has gained in market price in every year since, with no exception, making it an ideal investment for cautious investors.

Today, gold set yet another record high, this time $1262.30. Ho hum. Apparently that's not news either. Certainly it's getting little media attention, and I've heard no one talking of it on the street.

Now, no doubt, coin collectors are wise to the precious metal boom - but hey, that's what the world's most desirable coins have always been made of, so coin collectors can only be identified as a special interest group.

And of course, the gold exchange traded funds are vacuuming up gold, sometimes at tons per day, accumulating gold holdings weightier than those of most countries. But these continue to be viewed as marginal investments by most financial advisors.

The Chinese government recently pronounced gold "too volatile" (that is, variable in price), to justify it as a primary investment. Meanwhile, China is steadily adding to its gold reserves and advertising to the public - through state-sponsored television ads - that it is a wise investment. Hmmm....

Most of today's investment advisors were trained, and certainly accumulated their experience, during the great equity bull market of 1982-2000. Well, no secret that equities have been in a bear market since. But the old conditioning seems to die hard, as almost all of today's advisories continue to push mainstream stocks. By my analysis, that backward-looking investment class could remain locked in a holding pattern for another decade to come, and a further equity "crash" is not out of the question!

So where should conservative investors look today?

Well, while stocks have gone nowhere this decade, gold has gained over $1000 in market valuation during the same period, adding almost exactly 400% to its cash exchange value during the past 9 years. I don't know what that tells you, but it suggests to me that gold might actually be a better investment than equities!

What do most people think of gold today? I most commonly hear others ask, "Well, gold has gone pretty high, can it go much higher?" Beyond this naturally sceptical response, many professional advisors suggest that gold is a risky asset class, that it "doesn't do anything - it doesn't pay dividends or interest," and that it "will soon start heading back the other way." It is "too dangerous," "too volatile," or "already in bubble territory."

WRONG.

Unfortunately, the professionals have been talking like this since 2001, missing the full 400% appreciation in gold's value.

For those who have been following my blog, you know that I am expecting an ultimate high in the gold price in perhaps the $5-6000 range in approximately 2019, assuming that we don't slip into hyperinflation - in which case the price of virtually everything - including gold - will be dramatically higher than today, due to a currency collapse.

So, can gold go much higher than the present $1200 mark? Based again on my personal analysis, I think we'll see $1300-1400 later this year, and $2000-3000 as soon as 2012. Another slow period is likely following the next strong run, I'd guess at some point following an interim 2012 high, perhaps through 2014 or so. Then, I think popular sentiment will shift to something very different than the early-to-mid bull market behaviour we are seeing today.

Between 2014 and 2020, my guess is that "everyone" will be talking about gold, most people will hold a significant portion of gold in their portfolios, and gold will gain over $1000 in some years during that period. But that will also signal the final years of the gold bull market.

That is, it's not too late to catch another decade-long 400% gain in the gold price. I think it's going to do it again next decade!

It is an ineluctable quality of human psychology that we are late to detect trends. And, just when gold is truly popular, another asset class (possibly bonds and equities again) will be stirring in the beginnings of a new bull market - and most members of the public will be left behind - again!

My advice. Don't be left standing and watching. Examine the evidence for yourself, and think big - think gold for the decade to come!

And... enjoy the ride (which will be choppy at times)!

19 June 2010:

P. Radomski, my favourite technical analyst, does not see gold topping here. Summer is definitely a slow season for gold and gold stocks overall, as Adam Hamilton has shown (click here), but Radomski sees technical grounds to suggest that gold can continue to climb through mid-July. So even if you're a strategic investor, now may still be a good time to be holding - or even purchasing - gold investments!
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